The Expenditure incurred in relation to new plant which was still un-constructed was not revenue expenditure

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES, “G”, BENCH

BEFORE SHRI D.K. AGARWAL, J.M. AND

SHRI RAJENDRA SINGH, A.M.

MA No: 219/Mum/2011

Arising out of: ITA No.3614/M/2002

Assessment Year: 1995-96

M/s. Aditya Birla Nuvo Ltd.

(formerly Indian Rayon and

Industries Ltd.)

A-4, Aditya Birla Centre

S.K. Ahire Marg, Worli

Mumbai-400 030.

PAN No.: AAACI 1747 H

(Applicant)

Vs.

Asstt. Commissioner of Income Tax - 3(2)

Mumbai.

(Respondent)

Applicant by: Shri J.D. Mistry

Respondent by: Shri Jitendra Yadav

Date of hearing: 17.02.2012

Date of Pronouncement: 13.03.2012

ORDER

Per RAJENDRA SINGH (AM).

This miscellaneous application has been filed by the assessee requesting for recall of the order dated 28.2.2010 of the Tribunal in ITA No.3614/M/02. The request for recall has been made on the  ground of lack of adequate opportunity, incorrect application of judgment cited, non-consideration of the High Court judgment, the judgment being contrary to the Jurisdictional High Court and the  decision of the Tribunal and some factual errors.

2. It would be appropriate to give a brief background of the case before we proceed to deal with the miscellaneous application. The revenue in the ground No.6 had raised dispute regarding deletion of addition by CIT(A) in relation to expenditure incurred on construction of access road to the factory and laying of 132 KV electric transmission line in relation to Birla Periclase Plant. The Birla Periclase Plant was a new line of business. The assessee argued that it was a multi-product and well diversified company having several units in which there was complete interconnection, interlacing, interdependence and unity of control and therefore, the new unit was part of the existing business. The AO however disallowed the expenditure as capital expenditure. In appeal, the CIT(A) after observing that the assessee was not owner of the approach road and  also after referring to some judgments allowed the claim of the assessee aggrieved by which, revenue filed appeal before the Tribunal.

2.1 At the time of hearing of the appeal, the ld. AR for the assessee argued that the issue was covered in favour of the assessee by the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Excel Industries Ltd. (122 ITR 995) and by the decision of the Lucknow Bench of the Tribunal in the case of Indo Gulf Corporation vs. ACIT (715/Luck/1). The ld. AR also placed reliance on the following judgment in support of the case :-

i) 172 ITR 257(SC) CIT Vs Associated Cement Co. Ltd.

ii) 125 ITR 293(SC) L.H. Sugar Factory and Oil Mills(P.)Ltd. Vs. CIT

iii) 300 ITR 35 (Del.) CIT. Vs. Saw Pipes Ltd.

2.2 The ld. DR had argued that Birla Periclase Plant was a new plant which was under construction during the relevant year and had started commercial operation four years after the end of the relevant year,  and therefore, expenditure could not be allowed a revenue expenditure being related to the plant under consideration. The Bench thereafter re-fixed the case for seeking clarification as to whether plant had become operational or not. The ld AR for the assessee submitted that this was not a relevant factor in deciding the ground and argued that the expenditure had to be allowed as revenue expenditure even if the plant had not become operational during the year. It was further submitted that the issue was covered by the judgment of the Hon’ble High Court of Bombay in case of CIT vs. Excel Industries Ltd, (supra) and the judgment of Hon’ble High Court of Delhi in case of Saw Pipes Ltd. (supra). He, however, admitted that approach road was linked to the new plant. The ld. DR pointed out that the plant had started commercial production only in Feb.’98 which was clear from page-27 of the order of CIT(A). The expenditure incurred in relation to new plant which was still un-constructed was not revenue expenditure.

3. The Tribunal in the order dated 28.2.2010 had considered all the arguments advanced by both parties and also judgments relied upon. The Tribunal noted that, undoubtedly, the new plant was under construction and had started commercial production only 4 years after the relevant year. The Tribunal also observed that no doubt the new plant was part of the existing business as there was a complete interdependence, inter-connection and unity of control of all businesses being done by the assessee but each and every expenditure incurred in the business could not be allowed as revenue expenditure. The Tribunal observed that only revenue expenditure incurred for the purpose of existing business could be allowed and not capital expenditure. The Tribunal further observed that the case of  interest on borrowings was different as under 36(1)(iii) interest on borrowed capital had to be allowed if the capital is borrowed for the purpose of business irrespective of the fact whether capital is used for revenue expenditure or for acquisition of capital asset. The same, however will not be true in case of the other expenses which could be allowed under section 37(1) only if incurred wholly and exclusively for the purpose of business provided these are not capital in nature.

3.1 Thereafter, the Tribunal applied the test laid down by Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT (124 ITR 1) in deciding the nature of expenditure. The Hon'ble Supreme Court in the said case had held that lumpsum payment or test of enduring benefit was not conclusive in deciding the true nature of expenditure. The Hon'ble Supreme Court held that expenditure incurred would be capital in nature if it has resulted into any kind of advantage in the capital field but if the advantage consists merely in facilitating the assessee’s business or enable the management to conduct the assessee’s business more efficiently or profitably, the expenditure would be revenue in nature. The Hon'ble Supreme Court also held that if the expenditure was incurred for operation and work of existing profit making apparatus, it would be revenue in nature, but in case expenditure was on addition or augmentation of profit making apparatus the nature of the expenditure would be capital. The Tribunal noted that the approach road was linked to only the new plant which was still under construction and therefore, the expenditure could not be related to operation or working of existing profit earning apparatus which consisted of other units which were operational and to which the approach road was not linked. The approach road was  linked to the new unit under construction which was nothing but an addition and augmentation to the existing profit earning apparatus. The Tribunal therefore held that the expenditure was capital in nature. The assessee has filed miscellaneous application pointing out some mistakes which have been dealt with in the subsequent paras.

4. The first mistake pointed out is that the assessee had not been given adequate opportunity of hearing when the case was refixed for seeking clarification as to whether the unit was still under construction or had become operational. We have perused the records carefully. The case had been re-fixed for limited purpose for seeking clarification  as to whether the new unit had become operational during the year or not. The ld. AR as pointed out earlier, had argued that even if the unit had not become operational, expenditure was allowable as revenue expenditure. He also submitted that the case was covered by several judgments which have been mentioned earlier. The ld. AR never sought any adjournment to advance any further argument. It can not be therefore said that the assessee had not been provided with adequate opportunity of hearing. In any case, the ld. AR did not press  this issue as no serious arguments were advanced on this issue. We, therefore, reject the ground raised and hold that there is no apparent mistake on the ground of lack of adequate opportunity.

4.1 The second mistake pointed out is that the decision of the Tribunal to hold that the expenditure was capital in nature was contrary to the judgments of the Hon’ble High Court of Bombay in case of CIT vs. Excel Industries Ltd. (supra) and the decision of Lucknow Bench of the Tribunal in the case of Indo Gulf Corporation Ltd. vs. Addl. CIT in ITA No.715/Luck/01 dated 21.4.2010 for the assessment year 1998-99. Both these judgments had been duly considered by the Tribunal in para 3.6.5 and 3.6.6 respectively. It has been pointed out that the Tribunal had incorrectly mentioned that the new unit in case of Excel Industries Ltd. had already been set up during the year. It was pointed out that at page 999 of the judgment, it was clearly mentioned that the assessee had not acquired capital asset as the same remained the property of the electricity board. We have perused the said judgment. The Hon'ble High Court of Bombay had observed that the assessee had not acquired any capital asset on the ground that the assessee had no ownership of the assets but that cannot be considered as a finding as to whether the unit had been set up during the year or not. It is very clear from page 996 at which the Hon’ble High Court while stating the facts of the case has clearly mentioned that the new unit to manufacture phosphorus had been set up during the year ending 30.9.1972 which related to the assessment year  1973-74 which was under consideration. It is thus clear that the unit had been set up during the year and there is no mistake in the order of the Tribunal. It would be also pertinent to point out here that the observation of the Hon’ble High Court at page 999 that the assessee had not acquired any capital asset and that there was no finding of any enduring benefit, has to be considered in the context of prevailing legal position at that time when test of enduring benefit was being considered as reliable test for determining the nature of expenditure as capital or revenue. The said judgment was prior to the judgment of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra), in which test of enduring benefit was considered as non conclusive and it was held that what was required to be seen was whether the expenditure had resulted into any advantage in the capital field or in the revenue field. The judgment of Hon'ble Bombay High Court in case of Excel Industries Ltd. (supra), had therefore been rightly distinguished by the Tribunal, who applied the test laid down by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra).

We, do not, therefore, see any apparent mistake on this account.

4.2 Similarly, we also do not see any mistake on account of application of decision of Lucknow Bench of the Tribunal in the case of Info Gulf Corporation Ltd. (ITA No.715/Luck/01). The ld. AR has pointed out that in para-48, it was mentioned that new unit in that case was under construction and therefore finding of the Tribunal that the unit had already been set aside up become operational in that year was not correct. On careful perusal of the decision of the Tribunal in case of Indo Gulf Corporation Ltd.(supra), we find that there is no apparent mistake in application of the said decision by the Tribunal. It is clearly mentioned in para-38 at page 36 of the decision in case of Indo Gulf Corporation Ltd. that the copper unit had commenced commercial production on 16.3.1998 and said date of commercial production was again mentioned in para-40 at page -40. Therefore, the unit had become operational during assessment year 1998-99 to which the said case related. In para-48, referred to by the ld. AR. The AO had only discussed the ICAI guidelines on treatment of expenditure during construction period and, therefore, the same cannot be considered as finding of the Tribunal as to whether the unit had become operational during the year or not. Further in para-55, the Tribunal clearly mentioned in the operating portion of the judgment that the assessee was using approach road for its business and it was further mentioned in the said para that the use of the assets enabled the assessee to conduct the business more efficiently. It is thus clear that unit in that case had become operational in that year and the Tribunal had also decided the case in the understanding that unit was already working and assets were being used for efficient conduct of the business. Therefore, it was held as revenue expenditure which is in conformity with the judgment of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd.(supra). The said decision of the Tribunal therefore, could not be considered as a precedent for a situation where the unit is under construction and became operational four years later. Thus there is no apparent mistake in the order in not following the said decision of the Tribunal.

4.3 It has also been pointed out in the miscellaneous application that the issue was directly covered by the decision of the Hon’ble Delhi High Court in the case of CIT vs. Saw Pipes Ltd. (308 ITR 35) which had not been dealt with by the Tribunal. However, we find that the said judgment of the Hon'ble Delhi High Court had been duly considered by the Tribunal in para 3.6.2 of the order. It is mentioned in the said para that the Bench had drawn the attention of the ld. AR to the earlier judgment of the Hon’ble High Court of Delhi in case of Triveni Engineering Works Ltd. Vs. CIT (232 ITR 639), in which even the expenditure on project report in connection with the new unit had been held as capital expenditure even though project had not taken off. The Hon’ble High Court in that case had followed the judgment of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (124 ITR 1). It may be pointed out that neither the earlier judgment of Hon'ble Delhi High Court in case of Triveni Engineering Works Ltd. (supra), nor the judgment of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra), had been brought to the notice of the Hon'ble Delhi High Court in case of Saw Pipes Ltd.(supra). The Tribunal had therefore, not followed the judgment in case of Saw Pipes Ltd. (supra). We, therefore, see no apparent mistake on this account.

4.4 The assessee has also pointed out that the Tribunal was incorrect in its conclusion that the concept of “same business” was relevant only for allowance of interest expenditure as there were

several cases such as that of Hon'ble Supreme Court in case of Produce Exchange Corporation Ltd. vs. CIT (77 ITR 739) in which “same business” concept was applied for setting off of losses from one unit against profit of other unit. On careful consideration, we do not find any apparent mistake in decision of the Tribunal on this account. The Tribunal in para 3.6.3 had pointed out that Birla Perclase Unit was part of the existing unit as held in relation to the subsequent ground but the Tribunal observed that each and every expenditure incurred for the purpose of business could not be allowed as revenue expenditure. The Tribunal had given the example of interest expenditure because the said issue had been raised in the next ground and pointed out that the case of allowability of interest under section 36(1)(iii) was different as the only condition for allowability was that the borrowed capital should be used for the purpose of business and the interest has to be allowed even if the borrowing is used for acquisition of capital asset but for allowability of any other expenditure under section 37(1), it was required to be proved that the expenditure was not capital in nature. Thereafter, the Tribunal had examined the nature of expenditure following the principle laid down by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd.(supra). Since the Tribunal was examining the allowability of expenditure, the issue of set off of loss against profit of other unit belonging to same business was not referred to nor it was relevant and thus it has no bearing on the decision taken by the Tribunal and, therefore, there is no apparent mistake on this account.

4.5 The assessee in the miscellaneous application has also pointed out that similar expenditure had been allowed by the AO in assessment years 1997-98 and 1998-99 and this aspect had been over looked by the Tribunal but we find that the Tribunal had duly noted this aspect in para 3.6. of the order. The Tribunal had to decide the issue raised before it and, therefore, it could not be guided by the decision of AO and CIT(A) in the subsequent year. Moreover, nothing was brought on record to show that in the subsequent year, AO in relation to the same approach road allowed part of the expenditure, consciously treating it as revenue expenditure. In case, AO allowed in the next year, this could be only by mistake because on the same issue relating to the same road AO in the assessment year under consideration, had disputed the decision of CIT(A) allowing the expenditure by filing appeal before the Tribunal. Any such order of the AO in the subsequent year cannot be a ground for the Tribunal to allow the claim in the earlier year. We do not see any apparent mistake in the order of the Tribunal on this issue which has been decided by the Tribunal after carefully considering all relevant aspects and after following the law laid down by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd.(supra). The assessee in the miscellaneous application has also pointed out that the Tribunal in Para 3.6.4 incorrectly mentioned that the unit became operational in Feb.2008, when in fact unit had become operational in 1998. It is true that there is a typographical error in mentioning the year of commercial production as 2008 in place of 1998 but this has no bearing on the decision of the Tribunal because in any case the unit had become operational long after the relevant year under consideration. However, this mistake is corrected and year 2008 mentioned in Para 3.6.4 is substituted by 1998.

5. In view of the foregoing discussion and for the reasons given earlier, we do not find any apparent mistake in the order of the Tribunal. The Tribunal has no power to review its own decision. We, therefore, find no merit in the miscellaneous application and the same is rejected.

6. In the result, the miscellaneous application is rejected.

Order pronounced in the open court on 13.3.2012.

                                                       Sd/-                                  Sd/-

                                        (D.K. AGARWAL)        (RAJENDRA SINGH)

                                      JUDICIAL MEMBER   ACCOUNTANT MEMBER

Mumbai, Dated: 13.03.2012.

Jv.

Copy to:

The Applicant

The Respondent

The CIT, Concerned, Mumbai

The CIT (A) Concerned, Mumbai

The DR “ ” Bench

True Copy

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.